options

x Coulda Woulda Shoulda
not true. The best options traders make about 100% a year consistently.
That is about 6% per month after commissions. A realistic goal should
be about 2-3% per month. By learning the Market Maker Paradigm, as
taught in this book and in my live interactive webinars (web based
seminars), you will be able to scrutinize what is right and wrong about all
those advisory recommendations.
Option trading is on its way to becoming a household word
evolving from the four letter word that it has earned for burning so many
market participants. The players that are still around have learned from
the school of hard knocks that mistakes can be avoided if they trade with
tried and true rules. Most of the two-dozen conveyed option plays and
strategies are totally inappropriate for most and even the remaining few
investors who have used them. There are, however, a handful of
strategies that are suitable for even the most sophisticated options
strategist.
Today’s Market Makers are basically machines. I have helped
professional market maker software vendors design their systems to
automatically adjust all the quotes in the options chain with each tick in
the underlying market (stock and futures, etc.). For every options trade,
a market maker’s auto-quoting software performs, there follows an
instantaneous, offsetting delta hedge with the underlying instrument.
Appropriate market quote widths vary according to the risk associated
with each trade I.e. the bid / ask spread width is narrower for a vertical
spread (bull or bear debit or credit spread) than a single option and even
narrower for a butterfly or condor (where there is a smaller sensitivity to
moves in the underlying). This has leveled the playing field, and
powerful trading tools are now available to flatten the few year learning
curve, down to a few months. Once easy to learn, difficult to master
practices are being achieved by teenagers, the elderly and all ages in
between.
Volume levels have been picking up and are going to explode into
the stratosphere. This will translate into more liquidity, tighter markets
and better customer fills 2 . The bid/ask spreads are getting narrower as
market makers, on competing exchanges, fight for order flow (the edge 3 ).
As technology progresses, option spread trading will become more and
more prevalent and they will become easier and cheaper to transact. This
will, in turn, allow for more players and more liquidity.
2 Fill
Term used to describe the fact that an order has been executed. A fill includes the time, quantity and
price of a given instrument.
3 Edge
Term used for the potential profit margin afforded to market makers by having a bid price below and
an ask price above a theoretical value.
©2001 Charles M. Cottle RiskDoctor@RiskDoctor.com